Stock Market Prices Do Not Follow Random Walks:  Evidence From a Simple Specification Test

Lo, Andrew W.; MacKinlay, A. Craig

doi:10.3386/w2168

Cited by 518 publications

(736 citation statements)

References 17 publications

Supporting

Mentioning

688

Contrasting

Unclassified

Order By: Relevance

“…To resolve this shortcoming, Lo and MacKinlay (1988) developed tests for random walk based on variance ratio estimators. At the same time, these tests are especially useful for investigations in which stock returns are frequently not normally distributed.…”

Section: Variance Ratio Tests Of Random Walkmentioning

confidence: 99%

Financial Liberalization and Stock Price Behaviour in Asian Emerging Markets

Füss

2005

Econ Change

View full text Add to dashboard Cite

This paper exhibits tests of the random walk hypothesis and market efficiency for seven Asian emerging markets as a result of the influence of financial market integration. Random walk properties of equity prices influence the return dynamic and determine the trade strategies of investors. To examine the stochastic properties of local index returns and to test the hypothesis that stock market prices follow a random walk, the single variance ratio tests of Lo and MacKinlay, as well as the multiple variance ratio test of Chow and Denning are employed. The multiple statistical comparison of variance ratios is based on the Studentized Maximum Modulus distribution with control of the joint-test’s size. The weak-form market efficiency is also tested directly, using a nonparametric runs test. These tests are particularly useful for investigating stock prices the returns of which are frequently not distributed normally. Documented evidence shows that, from the perspective of local investors, weekly stock prices in major Asian emerging markets do not follow a random walk in the pre-liberalization period. However, in the post-liberalization period the weak-form efficiency hypothesis is generally adopted at the 5% level except for the smaller stock markets of Indonesia and Thailand. These empirical findings suggest that financial integration affects the return predictability in such a way that domestic investors might not be able to develop trading strategies allowing them to earn abnormal returns. Copyright Springer 2005Asian emerging markets, market efficiency, multiple variance ratio test, random walk, runs test, weak-form market efficiency, G12, G14, G15,

show abstract

Section: Variance Ratio Tests Of Random Walkmentioning

confidence: 99%

Financial Liberalization and Stock Price Behaviour in Asian Emerging Markets

Füss

2005

Econ Change

View full text Add to dashboard Cite

show abstract

“…In French (1993, 1996), this result is interpreted as a consequence of the fact that small firms, or firms with high book-to-market are riskier and, therefore, must obtain a higher long-term return. Some sort of positive autocorrelation (such as an AR(1) term) is observed for the three small-size portfolios (and consequently also for the SMB and HML risk factors) similar to Conrad and Kaul (1988) and Lo and MacKinlay (1988). All Fama and French factors and portfolios show excess kurtosis, and most are negatively skewed.…”

Section: Datamentioning

confidence: 87%

A Forecasting Model for Stock Market Diversity

2006

View full text Add to dashboard Cite

show abstract

“…Thus the standardized difference, which is asymptotically distributed as a standard normal variable, if no misspecification is present, can easily be constructed. In a framework similar to ours, this approach has been used to develop variance ratio tests for testing the null hypothesis of a random walk with iid increments, see Lo and MacKinlay (1988).…”

Section: Lemma 2: Under the Null Hypothesis Of Assumption 1 The Exacmentioning

confidence: 99%